John Meriwether

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pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black-Scholes formula, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, tail risk, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

With leverage and quant copycats running for the exits, LTCM found itself trapped in the fire. CHAPTER 2 Meriwether’s Magic Money Tree We’re sucking up nickels from all over the world. —Myron Scholes The Birth of Bond Arbitrage In 1974, John Meriwether, having just received his MBA from the University of Chicago, went to work as a government bond trader at Salomon Brothers. In those days, bond trading was not a quantitative endeavor. Traders bought or sold bonds they thought looked good or bad. John Meriwether realized that bond pricing was highly quantitative and saw that, if he could tap into this quantitative pricing, he could not only outperform his industry peers but make lots of money as well.

Meriwether approached Merrill Lynch’s Herbert Allison to tell him that the opportunities were large and the fund just needed more capital, which might have sounded like a double down plan. He asked if Merrill could invest between $300 and $500 million. Merrill refused.4 Eric Rosenfeld called PaineWebber, but it said no. John Meriwether met with Stanley Druckenmiller, the chief strategist and CIO for George Soros. It seemed that the Quantum Fund might contribute $500 million to the fund-raising efforts. LTCM also approached Julian Robertson of Tiger Management, but he declined. On August 26, Eric Rosenfeld and John Meriwether asked Warren Buffett for money. The next morning, Larry Hilibrand went to Omaha, Nebraska, to talk to Buffett. Buffett declined to invest because he thought the portfolio was too complicated.

Even with a new, more conservative risk management system, the LTCM crew was getting pulverized again. John Meriwether wrote in the March investor newsletter: The recent deleveraging and liquidity difficulties continued and intensified during March. Many of our strategies felt like they were at the center of market “storms…” We moved aggressively throughout March to reduce risk and increase liquidity…leverage [has been] cut roughly in half since Jan 1, 2008…we chose to reduce strategies which we believed had more “tail” risk or those more likely to be influenced by credit pricing effects…We appreciate your patience and trust during these difficult market conditions. —John Meriwether, letter to investors, April 17, 2008 JWMP’s RVOP fund began the month with $1,156 million in assets and finished the month with $865 million in assets, with no withdrawals in between.


pages: 314 words: 101,452

Liar's Poker by Michael Lewis

barriers to entry, Bear Stearns, Bonfire of the Vanities, business cycle, cognitive dissonance, corporate governance, corporate raider, disinformation, financial independence, financial innovation, fixed income, Home mortgage interest deduction, interest rate swap, Irwin Jacobs, John Meriwether, London Interbank Offered Rate, margin call, mortgage tax deduction, nuclear winter, Ponzi scheme, risk free rate, The Predators' Ball, yield curve

The bond traders of Goldman, Sachs, First Boston, Morgan Stanley, Merrill Lynch, and other Wall Street firms all play some version of Liar's Poker. But the place where the stakes run highest, thanks to John Meriwether, is the New York bond trading floor of Salomon Brothers. The code of the Liar's Poker player was something like the code of the gunslinger. It required a trader to accept all challenges. Because of the code—which was his code— John Meriwether felt obliged to play. But he knew it was stupid. For him, there was no upside. If he won, he upset Gutfreund. No good came of this. But if he lost, he was out of pocket a million bucks.

I always assumed that he smoked a more expensive blend than the rest, purchased with a few of the $40 million he had cleared on the sale of Salomon Brothers in 1981 (or a few of the $3. 1 million he paid himself in 1986, more than any other Wall Street CEO). This day in 1986, however, Gutfreund did something strange. Instead of terrifying us all, he walked a straight line to the trading desk of John Meriwether, a member of the board of Salomon Inc. and also one of Salomon's finest bond traders. He whispered a few words. The traders in the vicinity eavesdropped. What Gutfreund said has become a legend at Salomon Brothers and a visceral part of its corporate identity. He said: "One hand, one million dollars, no tears."

What I think Gutfreund had in mind in this instance was a desire to show his courage, like the boy who leaps from the high dive. Who better than Meriwether for the purpose? Besides, Meriwether was probably the only trader with both the cash and the nerve to play. The whole absurd situation needs putting into context. John Meriwether had, in the course of his career, made hundreds of millions of dollars for Salomon Brothers. He had an ability, rare among people and treasured by traders, to hide his state of mind. Most traders divulge whether they are making or losing money by the way they speak or move. They are either overly easy or overly tense.


pages: 198 words: 53,264

Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, asset allocation, Bear Stearns, bitcoin, Bretton Woods, buy and hold, buy low sell high, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial innovation, fixed income, hindsight bias, index fund, invention of the wheel, Isaac Newton, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, mega-rich, merger arbitrage, Myron Scholes, Paul Samuelson, quantitative easing, Renaissance Technologies, Richard Thaler, Robert Shiller, Robert Shiller, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, transcontinental railway, two and twenty, value at risk, Vanguard fund, Y Combinator

Michael Mauboussin has written about this idea many times, and he calls it the paradox of skill. The takeaway is that there is a lot of skilled market participants; so, intelligence alone is not enough. Other skills are required. Genius and its limitations are exemplified in no better way than by studying John Meriwether and his band of Einsteins at Long‐Term Capital Management. John Meriwether founded Long‐Term Capital Management in 1994 and before that he enjoyed a legendary two‐decade career as head of the fixed‐income arbitrage group and vice chairman at Salomon Brothers. At Salomon, he surrounded himself with some of the brightest minds in the industry.

Table of Contents Cover Preface CHAPTER 1: Benjamin Graham Notes CHAPTER 2: Jesse Livermore Notes CHAPTER 3: Mark Twain Notes CHAPTER 4: John Meriwether Notes CHAPTER 5: Jack Bogle Notes CHAPTER 6: Michael Steinhardt Notes CHAPTER 7: Jerry Tsai Notes CHAPTER 8: Warren Buffett Notes CHAPTER 9: Bill Ackman Notes CHAPTER 10: Stanley Druckenmiller Notes CHAPTER 11: Sequoia Notes CHAPTER 12: John Maynard Keynes Notes CHAPTER 13: John Paulson Notes CHAPTER 14: Charlie Munger Notes CHAPTER 15: Chris Sacca Notes CHAPTER 16: Michael Batnick Notes About the Author Index End User License Agreement Since 1996, Bloomberg Press has published books for financial professionals, as well as books of general interest in investing, economics, current affairs, and policy affecting investors and business people.

Quoted in Elston Electric Company, “Mark Twain and the Telephone,” OldTelephones.com, May 29, 2012. 8. Ibid. 9. Krass, Ignorance, Confidence, and Filthy Rich Friends, 91. 10. Zacks, Chasing the Last Laugh, 6. 11. Krass, Ignorance, Confidence, and Filthy Rich Friends, 197. 12. Ibid., 201. 13. Quoted in Zacks, Chasing the Last Laugh, 67–70. CHAPTER 4 John Meriwether Genius's Limits Investment success accrues not so much to the brilliant as to the disciplined. —William Bernstein Isaac Newton advanced science and thinking like few others ever have. With an IQ of 190, and the ability to calculate to the 55th decimal by hand, his intellect towered above Charles Darwin and Stephen Hawking.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

accounting loophole / creative accounting, Asian financial crisis, bank run, Bear Stearns, Bretton Woods, business cycle, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Meriwether, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, MITM: man-in-the-middle, Money creation, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, tail risk, Tax Reform Act of 1986, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Jimmy Carter Capitulation 10. Howard Jarvis and Jack Kemp Tapping the Anger 11. Paul Volcker, Jimmy Carter, and Ronald Reagan Revolution Completed Two THE NEW GUARD 12. Tom Peters and Jack Welch Promises Broken 13. Michael Milken “The Magnificent” 14. Alan Greenspan Ideologue 15. George Soros and John Meriwether Fabulous Wealth and Controversial Power 16. Sandy Weill King of the World 17. Jack Grubman, Frank Quattrone, Ken Lay, and Sandy Weill Decade of Deceit 18. Angelo Mozilo The American Tragedy 19. Jimmy Cayne, Richard Fuld, Stan O’Neal, and Chuck Prince Collapse Epilogue Notes Acknowledgments Index Illustration Credits A Note About the Author Other Books by This Author Introduction This book starts with a relatively unknown man named Lewis Uhler, a Southern Californian, who, like his father before him, hated the New Deal.

In the 1950s, with the rise of Xerox, Kodak, IBM, Sears, Syntex, Merck, Johnson & Johnson, Hewlett-Packard, and others, innovation and regulation went hand in hand with financial stability, rising wages, and income equality. Had he achieved that record, he would have deserved the praise he had received. The unleashing of unregulated self-interest since the 1980s, he believed, was a sufficient condition for prosperity. 15 George Soros and John Meriwether FABULOUS WEALTH AND CONTROVERSIAL POWER Until the mid-1980s, the takeover movement was the way to make the most money on Wall Street. Men like Henry Kravis, George Roberts, Boone Pickens, and Carl Icahn built enormous fortunes, and by the 2000s all were billionaires. Icahn was frequently listed among the twenty-five richest Americans, eventually with some $8–9 billion in personal wealth, and Kravis and Roberts were reported to have about half that.

In the late 1980s, hedge funds managed less than $100 billion in funds, in the late 1990s, some $400 billion, and in the mid-2000s, $2 trillion. When they borrowed multiples of that, their buying capability became enormous. Hedge fund pioneer George Soros (Illustration credit 15.1) Long-Term Capital Management founder John Meriwether (Illustration credit 15.2) George Soros, a Hungarian immigrant who arrived in America in the 1950s, became the unquestioned leader among hedge fund managers and remained so for twenty-five years. According to an estimate by Financial World magazine, Soros earned $200 million in 1987, second only to Michael Milken’s unprecedented earnings that year of $550 million.


pages: 831 words: 98,409

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bear Stearns, Bernie Sanders, Black Swan, Blythe Masters, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, eat what you kill, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, longitudinal study, Mark Zuckerberg, mass immigration, McMansion, mittelstand, Money creation, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, social intelligence, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, The Rise and Fall of American Growth, too big to fail, women in the workforce, young professional

We will examine how the system should be recalibrated in order to create a more inclusive society with a fairer economy that benefits all. CHAPTER 12 Super-Crash: “Executive Contagion” THE CRASH OF A TITAN: JOHN MERIWETHER Few people can take credit for generating billions of dollars in losses and single-handedly bringing01he0.inancial system to the brink of collapse. John Meriwether of Long Term Capital Management (LTCM) is one of them. At a wine tasting at Chef Daniel Boulud’s DBGB in the East Village, hosted by my friend Jim, a financier and avid wine collector, I met the now infamous Meriwether.

In a tribute to Château Mouton Rothschild, the theme of the tasting was “Mouton Madness.” An array of bottles had been carefully lined up on a side table, and the menu was designed to enhanc the tasting experience. As we mingled during the cocktail hour, I checked the place cards. To my delight, I saw that I would be seated by John Meriwether, the John Meriwether, who had made Wall Street history. In light of his colorful background, I expected a charismatic and swashbuckling personality who would mesmerize us with fascinating anecdotes; yet, contrary to my expectations, in walked a slight, unimposing, and shy man. He talked the entire evening about sports, despite my best efforts to move on to more compelling subjects.

.: The Financial Shadow Capital IMF Meetings in Istanbul: Dancing on the Titanic Power Summit: The Bilderberg Conference Stealth Power: Family Office Gatherings Feeding Off Power: Power Lunches Power Workout: Networking, Working, and Working Out “Superhub-Nobbing”: Private Parties The Higher Purpose of Networking: The Charity Circuit CHAPTER 8 OPPORTUNITY COSTS: THE DOWNSIDE OF THE UPSIDE Missing Out on Memorable Moments Stress Test: When Being a Superhub Is Not So Super Married to Their Jobs: Work-Family Life Imbalance Media Madness: Living Under a Microscope Super-Sick: Paying the Ultimate Price Clash of the Titans: Close Combat and Coups d’État Triumph and Defeat: A Turbulent Career CHAPTER 9 “WOMENOMICS”: THE MISSING LINK The Gender Gap: Women Missing in Action The Access Gap: Exclusive Means Excluding The Networking Gap: Schmooze or Lose The Assessment Gap: Performance versus Potential The Wage Gap: Selling Women Short The Failure Gap: Demoting Promotions The Mentoring Gap: Missing Out on Mentoring The Sexism Gap: The Wolves of Wall Street on the Prowl The Resilience Gap: Male Might and Female Feebleness Closing the Gender Gap: Superhub Christine Lagarde CHAPTER 10 REVOLVING SUPERHUBS: CREATING NETWORK MONOPOLIES Psychological Kidnapping The Revolving Door The Oscillating Megahub: Robert Rubin Open Doors: Tony Blair Cross-Connections: Cooperating Constructively in Times of Crises Launching a President “Legalized Corruption”: The Best Democracy Money Can Buy Purchasing Political Protection Relationship Power: Diffusing the Euro Time Bomb Super-Entity: The Capitalist Network That Runs the World CHAPTER 11 DE-LINKED: EXPULSION AND COMEBACK Sent into Exile: Dick Fuld Shock-Resistant: Larry Summers’s Network Meteoric Rise Against All Odds The Bull in Charge of the China Shop Den of Thieves: Mike Milken Complete Network Collapse: Dominique Strauss-Kahn Ponzi Schemes and Sex Scandals: Buddy Fletcher and Ellen Pao Omni-Connected: Michael Klein CHAPTER 12 SUPER-CRASH: “EXECUTIVE CONTAGION” The Crash of a Titan: John Meriwether The Big Picture: Capitalism in Crisis Debt and Financialization Wealth Gap and Inequality Globalization Winners versus Globalization Losers Approaching the Tipping Point When an Irresistible Force Meets an Immovable Object: Brexit The Next Crisis: Systemic Failure and Contagion The Culprit: The Superhubs or the System?


pages: 313 words: 101,403

My Life as a Quant: Reflections on Physics and Finance by Emanuel Derman

Bear Stearns, Berlin Wall, bioinformatics, Black-Scholes formula, Brownian motion, buy and hold, capital asset pricing model, Claude Shannon: information theory, Donald Knuth, Emanuel Derman, fixed income, Gödel, Escher, Bach, haute couture, hiring and firing, implied volatility, interest rate derivative, Jeff Bezos, John Meriwether, John von Neumann, law of one price, linked data, Long Term Capital Management, moral hazard, Murray Gell-Mann, Myron Scholes, Paul Samuelson, pre–internet, publish or perish, quantitative trading / quantitative finance, Sharpe ratio, statistical arbitrage, statistical model, Stephen Hawking, Steve Jobs, stochastic volatility, technology bubble, the new new thing, transaction costs, volatility smile, Y2K, yield curve, zero-coupon bond, zero-sum game

He accomplished this by making aggressively oracular and cryptic statements on whatever topic was under discussion. To my chagrin, his senior employees evangelized about his mysterious wisdom. I recently heard Roger Lowenstein, a reporter for the Wall Street Journal and author of When Genius Failed, comment that John Meriwether "never played unless he had an edge" Downs believed he had an edge everywhere. He had to dominate every exchange. Any fact you knew, any interest you had, was a glove slap that required him to retaliate and outduel you. If Mark Koenigsberg made a remark about solving a boundary-value problem in heat conduction, Downs responded with a Southern drawl about something clever (but unrelated) he claimed to have done with Fourier analysis twenty years earlier.

Once his contributions were recognized, he became a professor of finance at Chicago and then at MIT, finally leaving academia for Goldman Sachs in 1984. Though Merton and Scholes had each kept at least one foot in the academic world, both of them had worked as consultants or employees of Salomon Brothers at various tinges, and in 1994, became partners and attractors of capital at LongTerm Capital Management, the leveraged hedge fund run by John Meriwether and his ex-Salomon "arb group." I noticed that the 1997 Nobel Prize citation referred only to the university affiliations of Merton and Scholes, and not to their corporate connection-perhaps the Nobel committee really did have an aversion to the business world. Though the Nobel Prize sounds as though it is awarded by the gods, committees are merely groups of people with their own preferences.

Kopprasch's team had written reports containing some of the best research on fixed-income derivatives in the 1980s, high quality, well-written pieces that straddled and almost dissolved the border between academia and practice. It was their publications you turned to if you wanted to understand how to value swaps and swaptions before the necessary methodology appeared in textbooks. John Meriwether's arb group at Salomon cherry-picked some of their best people from Kopprasch's team, men like Victor Haghani and Greg Hawkins, who later moved with Meriwether to Long Term Capital Management (LTCM). When I ran Goldman's Quantitative Strategies a few years later, I always regarded the work done by Kopprasch's group as a model for what I tried to achieve.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Bear Stearns, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, Plutocrats, plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk free rate, risk-adjusted returns, Ronald Reagan, Savings and loan crisis, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

Knight,” Proceedings—Economic Policy Symposium—Jackson Hole, Federal Reserve Bank of Kansas City, August 25–27, 2005, accessed August 8, 2016, www.kansascityfed.org/publicat/sympos/2005/pdf/GD5_2005.pdf, 392. LTCM’s story was told in detail: Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000). A coming-out announcement for LTCM: Saul Hansell, “John Meriwether Rides, Again, Without Salomon This Time,” The New York Times, September 5, 1993, accessed August 8, 2016, www.nytimes.com/1993/09/05/business/john-meriwether-rides-again-without-salomon-this-time.html. LTCM coinvented the sovereign credit default swap market: Gillian Tett, Fool’s Gold: The Inside Story of J. P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe (New York: Free Press, 2009).

Major stock and bond markets around the world were hours away from collapse. The biggest banks were set to fall like dominoes starting with the perennial weak link Lehman. Investors stood to lose more in relative terms than they did in 2008. This was not reported at the time despite intense media focus on LTCM and its reclusive founder, John Meriwether. Only a few insiders at LTCM, the Fed, Treasury, and foreign finance ministries saw the whole picture and understood its significance. Elites foamed the runways and brought LTCM in for a safe landing despite four engines in flames. Global investors were inside the plane with seat belts fastened and no exit.

Wall Street is back to business as usual, relying on misleading models such as value at risk. The next catastrophe will be exponentially larger than the last two. The next time the world will not bounce back. The Experts I joined LTCM in February 1994 and reported to the firm’s founder, legendary bond trader John Meriwether, known as “JM.” I came on board before the fund opened for business, and remained through the collapse, rescue, and unwind until August 1999. The founding partners included two future Nobelists and other fathers of modern finance. There was never as great a collection of financial talent in one place, including universities and think tanks, as there was at LTCM.


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Black Swan, Black-Scholes formula, bonus culture, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, statistical model, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

He: Mentored academics who further developed his theoretical mechanism, called arbitrage. Created the tools that made the mechanism feasible. Trained many of the people who went to Wall Street and implemented it. One of the MBA students who studied under Miller in the 1970s was John Meriwether, who went to work for the Wall Street firm Salomon Brothers. By the end of that decade, he had put into practice what Miller only theorized about, creating a trading desk at Salomon specifically aimed at profiting from arbitrage opportunities in the bond markets. Meriwether and his Salomon traders, together with a handful of other market-making firms, used the new futures contracts to find a mattress in securities markets that otherwise would have been too dangerous to trade in.

But Fitch was relying on its categories’ independence to support an investment-grade rating projecting thirty years into the future. To onlookers it appeared as if the credit police were allowing Usi to write himself a winning lottery ticket whenever he liked: he now had a two-way arbitrage machine doing for credit what John Meriwether had done for interest rates. Barclays’ trading book could now invest in assets that paid a full percentage point more than what Usi needed to pay out on the CDOs. For a $15 billion portfolio, that suggested profits in excess of $150 million per year. Usi now had to name his creations. During his English boarding school childhood, he had been assigned Latin texts by Cicero, Tacitus, and Livy and had fallen in love with ancient Rome.

It was the financial analogue of pricing a car according to the cost of manufacturing it, filling it with fuel, and insuring it to drive on the road. Better still, there was a built-in consistency check in the form of arbitrage. There is no reason why the price of a Toyota Prius must replicate the cost of everything that went into it. But as John Meriwether at Salomon and others demonstrated, derivatives allowed you to extract profit from the discrepancies between financial products and the raw materials used to construct them. As long as you didn’t leverage up your bets the way LTCM had, this was a very low-risk exercise and tended to push prices toward their theoretical value.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

"Robert Solow", affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, Black Swan, Black-Scholes formula, Bonfire of the Vanities, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial innovation, fixed income, frictionless, frictionless market, George Akerlof, implied volatility, index arbitrage, intangible asset, Jeff Bezos, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, loose coupling, margin call, market bubble, market design, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Shiller, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, tail risk, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

But when Marty called yet again to discuss the role of risk manager at Salomon, somehow I managed to say yes. In 1994, Salomon was the biggest risk-taking firm in the world. It was at the pinnacle of the bond market— even after having its wings clipped by a Treasury-auction scandal that had cost the jobs of Gutfreund, John Meriwether, and several others in senior management. The high-powered, big-brained proprietary trading group had become the envy of Wall Street. John Meriwether and the bulk of his team had just headed off to start LTCM, but the principals who remained continued to trade in the same size. And along with the pull from Marty, there was a good reason for me to look outside Morgan Stanley.

Every Thursday afternoon part of the conference room was cleared for a masseuse, who brought in her table and provided massages for the group. Inlaid in the center of the aisle, between the rows of desks, was a worn relic that had also adorned their area when they were on the fixed income floor: a maroon two-bythree-foot prayer carpet that John Meriwether had bought years earlier. These silly outward trappings belied the real spirit of the group: The arb unit was the most intellectually intense place I have ever run into. The lights burned a little bit brighter there. It was a concentrated remnant of the Salomon of old. Rosenbluth, a roommate of Stavis’s at the University of Pennsylvania, was by 1997 running the unit jointly with him.

Both outfits were famous for strategies that would bring them both to grief: relative value trades. The principals of LTCM had pulled up stakes at Salomon in 1993 and 1994 and set up shop in what became known as “Salomon North” in Greenwich, Connecticut. The original fixed income arbitrage group had been founded in the mid1980s by John Meriwether, who was forced out of the firm to make peace with the Federal Reserve after the 1991 Treasuries scandal. Meriwether & Co. landed at LTCM largely intact, a cadre of MIT-trained professionals, many with PhDs and former careers as university professors. Meriwether 100 ccc_demon_097-124_ch06.qxd 7/13/07 2:43 PM Page 101 LT C M R I D E S THE LEVERAGE CYCLE TO HELL has been celebrated for his coolness under pressure, but that is not an uncommon trait among top traders.


pages: 419 words: 130,627

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase by Duff McDonald

bank run, Bear Stearns, Blythe Masters, Bonfire of the Vanities, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Exxon Valdez, financial innovation, fixed income, G4S, housing crisis, interest rate swap, Jeff Bezos, John Meriwether, Kickstarter, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, money market fund, moral hazard, negative equity, Nelson Mandela, Northern Rock, profit motive, Renaissance Technologies, risk/return, Rod Stewart played at Stephen Schwarzman birthday party, Saturday Night Live, sovereign wealth fund, statistical model, Steve Ballmer, Steve Jobs, technology bubble, The Chicago School, too big to fail, Vanguard fund, zero-coupon bond, zero-sum game

A scathing 1995 piece by Suzanna Andrews in New York magazine made the case that Maughan had been in over his head at Salomon yet had a tendency to say things like, “I am the hardest-working man at Salomon Brothers.” Most top executives also thought he put politics ahead of the interests of the firm, a conclusion arrived at after he seemingly forced the star trader John Meriwether out of Salomon—Meriwether had gone on to found Wall Street’s hottest hedge fund at the time, Long-Term Capital Management. A stream of talented partners had also left during Maughan’s tenure. Then there was the issue of Maughan’s wife, Va. A onetime Pan Am reservation agent who had changed her name from Lorraine Hannemann, Va Maughan was a gossipmonger’s dream.

But in the spring of 1998, it began suffering increasingly frequent losses as the markets remained skittish and relatively illiquid. By the end of April, in fact, it had already lost $200 million for the year. Although Salomon had for years delivered outsize profits on its arbitrage bets, Dimon and Weill began to sense that maybe the jig was up. With a number of defections from Salomon, most prominently John Meriwether and his team at the powerful hedge fund Long-Term Capital Management, other firms were using similar if not identical strategies, with the inevitable result that the arbitrage opportunity was shrinking. This, in turn, meant that the risk-return trade-off on the unit’s big bets was heading in the wrong direction.

(LTCM, in fact, was jokingly referred to by the Travelers crowd as “Salomon North.”) Long-Term Capital Management wasn’t just any old hedge fund. Through the magic of leverage, it had turned $5 billion of capital into a $100 billion giant, and its sudden shakiness posed a threat to the entire market. John Meriwether, the head of LTCM, called Dimon on August 25, proposing that instead of continuing to sell its positions, Dimon might continue combining the remnants of Salomon’s arbitrage group with LTCM. He was rebuffed, in part because Sandy Weill wasn’t partnering with any hedge funds, let alone the teetering LTCM.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

"Robert Solow", Albert Einstein, Bayesian statistics, Bear Stearns, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, Thales and the olive presses, Thales of Miletus, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

Scholes had intimate access to the world’s best stock price database and could thus test the efficiency of real markets as benchmarked against the predictions of his theories. Merton and Scholes collaborated on some of these studies, especially following Scholes’ return to the Sloan School. Both Merton and Scholes also supervised graduate students and consulted with mutual fund and investment houses part time. On many occasions, they had the chance to work with John Meriwether, the influential and successful investment director of Salomon Brothers, a significant employer of MIT finance graduates. The investment house’s proprietary algorithms for the trading of fixed-income securities employed Black-Scholes-Merton models that had been modified and extended in-house to earn arbitrage profits for Salomon Brothers.

I said, ‘Wait a minute, that’s a big engine there,’ and before I knew it he had laid rubber, hit a curb and landed in my neighbor’s yard in a mangled heap.’’5 The 1998 ignoble experience A few years before their shared Nobel Prize, both Merton and Scholes reunited once again over a new investment house opportunity. In 1993 John Meriwether, the Salomon Brothers investment guru who had left his employer a couple of years earlier, got together with two investor colleagues, Eric Rosenfeld and James McEntee, and formulated a scheme for a new type of investment house. They asked Merton to join them. Soon, a number of Salomon Brothers traders, analysts, advisors, and directors had also been enlisted, including Scholes.

The talk resulted in an offer by AIG, Goldman Sachs, and Berkshire Hathaway to buy out the partners of Long Term Capital Management for $250 million and inject an additional $3.75 million into the fund, which they proposed would be absorbed into the Goldman Sachs trading department. The Nobel Prize, Life, and Legacy 171 The group gave John Meriwether and Long Term Capital Management an hour to decide whether they would accept the offer the New York Fed thought they could not refuse. The company’s principals let the offer lapse because they felt the firm was worth at least $4.7 billion. Instead, the New York Fed organized a $3.625 billion bailout not so much to save the company but to avoid the collapse of other companies related to the fund.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Savings and loan crisis, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, tail risk, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs, two and twenty

There, above the fold, the Journal reported their decision to return two fifths of their fund’s capital, $2.7 billion, to outside investors. In the new world of soaring leverage, Long-Term Capital had no need for so much client cash. By boosting its borrowing, it could maintain its towering portfolio on a thinner foundation. It could be ambitious and slender, like an I. M. Pei creation.2 Long-Term Capital Management’s founder, John Meriwether, had been one of the first executives on Wall Street to see the potential in financial engineering. As a rising star at Salomon Brothers in the mid-1980s, he had set out to transform the small trading group he managed into “a quasi-university environment.”3 Meriwether’s plan was to hire young stars from PhD programs and encourage them to stay in touch with cutting-edge research; they would visit finance faculties and go out on the academic conference circuit.

In emerging markets, LTCM had constructed essentially the same trade: It shorted relatively stable bonds and owned risky ones, and again it lost badly. By the end of that Friday, Long-Term had lost a total of $550 million, 15 percent of its capital.30 It was the middle of August, and most of Long-Term’s senior partners were enjoying the vacation they had deferred earlier in the summer. John Meriwether was in China. Eric Rosenfeld was in Idaho. LTCM’s counsel, Jim Rickards, was with his family in North Carolina. The skeleton crew in Greenwich stared at the trading screens in wonder. It was not just money that was going up in smoke. Long-Term’s confident assumptions were burning too; it was a bonfire of the fund’s own vanities.

On the other hand there is a darker view—that sophisticated traders lack the muscle to enforce price efficiency and that, knowing the limits of their power, they will prefer to ride trends rather than fight them. Among the hedge funds we have encountered, there are examples of both schools. Long/short investors, from A. W. Jones in equities to John Meriwether in bonds, aim to buy underpriced securities and sell expensive ones, pushing prices to their efficient level. Meanwhile, trend followers such as Paul Tudor Jones make no claim to understand the fundamental value of anything they trade. They buy securities as they go up and dump them as they go down.


pages: 477 words: 144,329

How Money Became Dangerous by Christopher Varelas

activist fund / activist shareholder / activist investor, Airbnb, airport security, barriers to entry, basic income, Bear Stearns, bitcoin, blockchain, Bonfire of the Vanities, California gold rush, cashless society, corporate raider, crack epidemic, cryptocurrency, discounted cash flows, disintermediation, diversification, diversified portfolio, Donald Trump, dumpster diving, eat what you kill, fiat currency, fixed income, friendly fire, full employment, Gordon Gekko, greed is good, interest rate derivative, John Meriwether, Kickstarter, Long Term Capital Management, mandatory minimum, mobile money, Modern Monetary Theory, mortgage debt, pensions crisis, pets.com, pre–internet, profit motive, risk tolerance, Saturday Night Live, shareholder value, side project, Silicon Valley, Steve Jobs, technology bubble, The Predators' Ball, too big to fail, universal basic income, zero day

He got away with it for a while, until a few Salomon customers noticed that their names had been used to buy government securities, even though they couldn’t recall having approved the purchases—not too dissimilar to the 2016 Wells Fargo scandal in which accounts were opened under customers’ names without their knowledge in order to meet quotas. In April 1991, Mozer confessed to his mentor, famed trader John Meriwether, that he had messed with a securities auction. Meriwether brought the bad news to Salomon’s legendary CEO John Gutfreund (pronounced “good friend”), who shared it only with the firm’s president, Tom Strauss, and general counsel, Don Feuerstein. Normally, if a violation of this magnitude were uncovered, senior management would call an emergency board meeting and immediately self-report to the Securities and Exchange Commission to save the firm and their own skin, hanging the violator out to dry.

Women’s Wear Daily dubbed the couple “Social Susie” and “Solemn John.” Although Gutfreund had an office, he rarely used it. He preferred to be in the action. So he kept a desk out on the trading floor, and it was my good luck to be stationed next to him—and not far from another Salomon Brothers powerhouse, John Meriwether—after the head of recruiting decided the summer associates needed home locations when not observing a specific trader. I knew of Gutfreund’s famous advice to rookie traders—to wake up each morning “ready to bite the ass off a bear”—and I was eager for him to toss some similar scraps of wisdom my way, but he never spoke to me that summer except once, when he handed me an annual report he had finished reading and said I should check it out.

Or perhaps Mozer’s actions were a result of Salomon’s freewheeling culture, which espoused the belief that it’s better to beg forgiveness than to ask permission—he may have imagined that he would be pardoned and possibly even rewarded for maximizing profits and exposing this weakness in the system. Or there might have been another factor, dating back to Mozer’s transfer to the government bond desk in 1983 and his history with John Meriwether. Meriwether was one of the most powerful people at the firm, vice chairman of the board and the head of the high-stakes proprietary trading operation. While most salesmen and traders worked for the clients and collected commissions on those deals, Meriwether and his proprietary traders used the firm’s own capital to take positions on behalf of the firm.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, John Meriwether, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, paper trading, Paul Samuelson, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond, zero-sum game

Also, we made a tremendous amount of money that year and I won the bet just before bonuses were paid, which helped. It sounds like you were somewhat influenced by John Meriwether on that bet except that you learned from John Gutfreund’s mistake and put a cap on it! Exactly, it was my Liar’s Poker moment. What market books do you recommend to your junior traders? I’m a semiproponent of the Chartered Financial Analyst (CFA) program, simply because I believe it’s a good program that covers all areas of finance. 159 THE TREASURER LIAR’S POKER JOHN GUTFREUND: “One hand, one million dollars, no tears.” JOHN MERIWETHER: “No John, if we’re going to play for those kind of numbers, I’d rather play for real money.

For one, the arbitragefocused fund drifted into global macro trades and its subsequent unwind had ramifications for global macro markets.Two, it offers insights into what can go wrong at a hedge fund, as well as shed light on such important issues as liquidity, risk management, and correlations. And three, almost every interviewee in this book mentions LTCM. LTCM was started in 1994 by infamous Salomon Brothers proprietary trader John Meriwether, who hired an all-star cast of financial minds including former Fed vice chairman David Mullins and Nobel Prize winners Robert Merton and Myron Scholes (pioneers in option pricing theory and methodology). LTCM started with $1.3 billion in assets from a who’s who list of investors and initially focused on fixed income arbitrage opportunities (which had become more attractive as spreads widened after the bond market rout of 1994).

While his style may require a lot of reading and research on individual companies before finally selecting the stocks he will use to express his larger macro views, one particular story drives home the point that he is not a classic equity fund manager, but rather a trader first and foremost. While at golf school in Florida shortly after the meltdown of Long Term Capital Management in 1998, Bessent found himself teamed up with John Meriwether of LTCM infamy. The golf coach paired the two, reasoning, “You guys do the same thing.” Bessent replied, “No we don’t—when a trade goes against John, he adds.When a trade goes against me, I cut.” How did you become a global macro hedge fund manager? I was a liberal arts major at Yale and wanted to become a journalist.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

Andrei Shleifer, asset allocation, Bear Stearns, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, fixed income, follow your passion, Gordon Gekko, high net worth, index fund, John Meriwether, Long Term Capital Management, mail merge, margin call, mass immigration, merger arbitrage, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, Silicon Valley, tail risk, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, two and twenty, Vanguard fund, Y2K, Yogi Berra, zero-sum game

And Now for the Not-Quite-as-Successful By the mid-90s, it appeared that hedge funds had found the Shangri-La of investments. But just as they were about to meet the leprechaun and his pot of gold at the end of the rainbow, it happened—Long-Term Capital Management (LTCM) collapsed in 1998 and was later rescued by the federal government. Founded in 1994 by a proprietary trading legend, John Meriwether from Solomon Brothers; two Nobel Prize-winning economists, Robert C. Merton and Myron Scholes; and a slew of finance wizards, LTCM used an arbitrage strategy that exploited temporary changes in market behavior. By pair trading and betting on price convergence over a range of scenarios (we’ll discuss those strategies in Chapter 7), the LTCM band of brothers leveraged their $4 billion fund until it had a notional exposure of over $1 trillion dollars.

Thus, the goal of the alpha-seeking manager is to always manage the downside while making sure money can get made with a touch of diversification, reduced volatility, and risk. A Word of Caution In the 1980s, Long-Term Capital Management (along with its legendary credit arbitrageur leader, John Meriwether) was one of the first hedge funds to quantify the estimate of the correlations among various trades and mathematically measure risk through a technique known as “value at risk.” Although we learned of LTCM’s eventual demise caused by hubris in Chapter 2, Meriwether, Robert Merton, and Myron Scholes helped facilitate the correlation model.


pages: 374 words: 114,600

The Quants by Scott Patterson

Albert Einstein, asset allocation, automated trading system, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, Financial Modelers Manifesto, fixed income, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Meriwether, John Nash: game theory, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

It was a sleepy business, and few traders even knew what they were or how to use the exotic swaps—or had any idea that they represented a new front in the quants’ ascendancy over Wall Street. Indeed, they would prove to be one of the most powerful weapons in their arsenal. The quants were steadily growing, moving ever higher into the upper echelons of the financial universe. What could go wrong? As it turned out, a great deal—a four-letter word: LTCM. In 1994, John Meriwether, a former star bond trader at Salomon Brothers, launched a massive hedge fund known as Long-Term Capital Management. LTCM was manned by an all-star staff of quants from Salomon as well as future Nobel Prize winners Myron Scholes and Robert Merton. On February 24 of that year, the fund started trading with $1 billion in investor capital.

Say the last bet was twelve 9s. If the bills did in fact have twelve 9s, the trader who called would have to pay everyone. If the bills didn’t have twelve 9s, the trader who made the bet paid up. In Lewis’s book, the game involved Salomon chairman John Gutfreund and the firm’s star bond trader John Meriwether, future founder of the doomed hedge fund LTCM. One day, Gutfreund challenged Meriwether to play a $1 million hand of Liar’s Poker. Meriwether shot back: “If we’re going to play for those kind of numbers, I’d rather play for real money. Ten million dollars. No tears.” Gutfreund’s response as he backed away from Meriwether’s bluff: “You’re crazy.”

Fama and French cranked up: The paper was called “The Cross Section of Expected Stock Returns,” published in the June 1992 edition of Journal of Finance. One day in the early 1980s: Nearly all of the details of Boaz Weinstein’s life and career come from interviews with Weinstein and people who knew and worked with him. In 1994, John Meriwether: A number of details of LTCM’s demise were taken from When Genius Failed: The Rise and Fall of Long-Term Capital Management, by Roger Lowenstein (Random House, 2000), and Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It, by Nicholas Dunbar (John Wiley & Sons, 2000). 6 THE WOLF On a spring afternoon in 1985: The Liar’s Poker account is taken from The Poker Face of Wall Street, by Aaron Brown (John Wiley & Sons, 2006), as well as interviews and email exchanges with Brown.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, tail risk, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Even if the hedge fund failed, banks made money buying the positions at distressed prices. Banks provided a true cradle-to-grave service for hedge funds. In the Long Run, We Are All Dead LTCM was known as Salomon North, reflecting its Greenwich, Connecticut base. After leaving Salomon Brothers in 1991 following a trading scandal, John Meriwether established LTCM in 1994 with capital of $4 billion. Investors paid a 2 percent management fee and 25 percent incentive fee on earnings after a threshold level of return. The operation sought to replicate Salomon Brothers’ successful fixed income arbitrage unit. Joining Meriwether were key Salomon traders Eric Rosenfield, Lawrence Hilibrand, Victor Haghani, and Greg Hawkins.

On August 21, LTCM lost $550 million, mainly on its credit spread and equity volatility positions. LTCM needed cash to cover losses. The unflappable Meriwether advised that: “we’ve had a serious markdown but everything’s fine with us.”27 LTCM discovered what John Maynard Keynes knew: “the market can remain irrational longer than you can remain solvent.”28 On September 2, 1998 John Meriwether advised investors that LTCM had lost 52 percent of its value: As you are all too aware events surrounding the collapse of Russia caused large losses and dramatically increased volatility in global markets.... Many of the fund’s investment strategies involve providing liquidity to the market.

Before the crisis, when asked about John Paulson, a banker at Goldman Sachs told a potential investor that he was “a third rate hedge fund guy who didn’t know what he was talking about.”18 One person noted: “In the hedge-fund industry the only bad thing you can do is lose people’s money.”19 Even that wasn’t strictly speaking true. In 1999, after the collapse of LTCM, John Meriwether had no difficulties raising new funds for JWM Partners LLC (JWM), a lower risk version of LTCM. In 2008 the $2.3 billion JWM fund found itself in trouble. In a familiar message, Meriwether told investors: “We have sharply reduced the risk and balance sheet of the portfolio.” JWM closed its main fund after losing 44 percent between September 2007 and February 2009.20 Subsequently, in 2010, Meriwether opened his third hedge fund venture—JM Advisors Management.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

accounting loophole / creative accounting, Albert Einstein, Asian financial crisis, asset-backed security, Bear Stearns, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business process, buy and hold, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, disinformation, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial innovation, fixed income, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Meriwether, locking in a profit, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk free rate, risk-adjusted returns, risk/return, Satyajit Das, shareholder value, short selling, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

LTCM is a story of the confluence of many divergent trends – quantitative finance, risk modelling and derivatives trading. Naturally, it is also about the staples of financial markets – fear and greed. LTCM was a hedge fund based in Greenwich, Connecticut, USA. The fund was formed in 1994 by a group of ex-Salomon Brothers traders led by John Meriwether. The key principals (in addition to Meriwether) included DAS_C06.QXP 8/7/06 168 4:43 PM Page 168 Tr a d e r s , G u n s & M o n e y Eric Rosenfield, Lawrence Hilibrand, William Krasker, Victor Haghani, Greg Hawkins and David Modest. LTCM principals included Nobel Prize winners Robert Merton and Myron Scholes and former regulators including ex-Federal Reserve Board Vice Chairman David Mullins.

Equity markets became more volatile. LTCM appears to have lost DAS_C06.QXP 8/7/06 4:43 PM Page 173 5 N The perfect storm – risk mismanagement by the numbers 173 around $550 million on 21 August alone. The losses related to its credit spread and equity volatility positions. On 2 September 1998, John Meriwether issued a letter to investors that revealed LTCM had lost 52% of its value. ‘As you are all too aware events surrounding the collapse of Russia caused large losses and dramatically increased volatility in global markets . . . Many of the fund’s investment strategies involve providing liquidity to the market.

Critics now suggested that perhaps they should have focused on a specific Greek word – ‘hubris’, meaning overconfidence or insolent pride. Endgame The banks worked with the LTCM principals to gradually liquidate the portfolio over about a year and were paid back ahead of schedule. Subsequently, John Meriwether established a new hedge fund (JWM Associates), although not many of the original principals followed him to his new venture. Scholes set up a separate hedge fund with some of the LTCM gang. After the fall, the principals grizzled about the cynical way that the dealers had used conditions to rip LTCM apart – it was sour grapes.


pages: 389 words: 109,207

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone

Albert Einstein, anti-communist, asset allocation, Bear Stearns, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, capital asset pricing model, Claude Shannon: information theory, computer age, correlation coefficient, diversified portfolio, Edward Thorp, en.wikipedia.org, Eugene Fama: efficient market hypothesis, high net worth, index fund, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, John Meriwether, John von Neumann, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Myron Scholes, New Journalism, Norbert Wiener, offshore financial centre, Paul Samuelson, publish or perish, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, short selling, speech recognition, statistical arbitrage, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, value at risk, zero-coupon bond, zero-sum game

“You’re all right,” Salerno said. “You’re the only guy on Wall Street who’s not a rat.” “But I don’t know anything,” Mulheren insisted. “I don’t have anything bad to tell them.” “Oh, yeah,” Salerno said, rolling his eyes. “Right.” PART SIX Blowing Up Martingale Man GAMBLING RAN IN John Meriwether’s family. As a boy, he learned blackjack from his grandmother and was permitted to place bets at the racetrack and on sports. Always looking for an edge, John would check the weather forecast for wind velocity at Wrigley Field and use that to decide how to bet on Cubs games. Born in Chicago in 1947, Meriwether was a bright, mathematically inclined kid educated by priests.

In a world where return is so highly valued, people will always be tempted to venture out onto the precipice. The Kelly criterion tells exactly how far a trader can go before tumbling into the abyss. Mean-variance analysis and VaR do not. In the most direct human terms, LTCM’s problem was group-think. Under John Meriwether, there was an organizational culture in which questions of risk were pressed only so far. This appears to have led to systematically rosy projections. Too little of the fund’s brainpower went to skeptical probing of what could have gone wrong. LTCM goofed by greatly underestimating the chance of a panic in which its trades would become highly correlated.


Trading Risk: Enhanced Profitability Through Risk Control by Kenneth L. Grant

backtesting, business cycle, buy and hold, commodity trading advisor, correlation coefficient, correlation does not imply causation, delta neutral, diversification, diversified portfolio, fixed income, frictionless, frictionless market, George Santayana, implied volatility, interest rate swap, invisible hand, Isaac Newton, John Meriwether, Long Term Capital Management, market design, Myron Scholes, performance metric, price mechanism, price stability, risk free rate, risk tolerance, risk-adjusted returns, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two-sided market, value at risk, volatility arbitrage, yield curve, zero-coupon bond

After all, I was managing risk at a hedge fund of similar focus (if more discipline), whose wings also got singed a bit in the cross fire of these events but who rose to much greater heights in their aftermath. Bringin’ It on Home 229 Besides, the topic is simply too juicy to resist. I don’t know of anyone I’ve ever encountered in the financial services industry that did not have great admiration for the LTCM team. Its leader John Meriwether, is responsible for dramatic advancements in the field of relative value fixed income trading—a strategy that many (including this reporter) believe to be both viable and vital to this day. My own personal case of blind devotion, deriving largely from my status as a wanna-be academic, was and still is skewed towards Robert Merton and Myron Scholes, whose contributions to the world of modern financial engineering speak for themselves, and need no particular embellishment from yours truly.

The story of how it all came crashing down—how this group managed first to practically corner the market on an unimaginable array of global securities; then to watch helplessly, unable to liquidate, as this portfolio dropped billions in value over a matter of days (in the process nearly taking down a good portion of the world’s leading capital markets institutions); and ultimately to create a situation that required government intervention to avert a global market crisis—is a matter of prolific public record. However, there are some mouthwatering tidbits here, so bear with me for a few more paragraphs, and you’ll not be sorry. For the uninitiated, Long-Term Capital Management was a hedge fund concern created by John Meriwether (former vice chairman of Salomon Brothers). LTCM applied the trading techniques that (to give the man his props) JM had pioneered, this time in a private funding vehicle, where he wouldn’t have to be bothered by issues like regulatory oversight and shareholder concern about earnings volatility.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

Words like “slightly” and “moderately” in Fedspeak did not mean the same thing. Every nuance mattered. Two years after I arrived in New York, tremors shook the markets when the hedge fund Long-Term Capital Management (LTCM) shocked the Street by declaring it was on the verge of insolvency. The brainchild of John Meriwether, former head of bond trading at Salomon Brothers, LTCM was launched in February 1994 with $1.25 billion in capital and a cadre of hotshots who built financial models that would take bond arbitrage to never-before-seen heights of profitability. Meriwether hired PhD economists David Mullins, former vice chairman of the Federal Reserve, and Robert C.

How do we know when irrational exuberance: FRB: Alan Greenspan, “Central Banking in a Democratic Society” (speech, American Enterprise Institute for Public Policy Research, Washington, DC, December 5, 1996), www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm. He had adopted the maxim: FRBD: Mark Wynne, “How the FOMC Talks” (speech, Sul Ross University, Alpine, Texas, October 29, 2014), www.dallasfed.org/assets/documents/educate/events/2014/14summit_wynne.pdf. The brainchild of John Meriwether: Stephanie Yang, “The Epic Story of How a ‘Genius’ Hedge Fund Almost Caused a Global Financial Meltdown,” BusinessInsider Singapore, July 11, 2014. As markets sank, the hedge fund lost $2 billion: Ibid. At least $1 trillion was at risk: Ibid. The heads of more than a dozen: Michael Fleming and Weiling Lui, “Near Failure of Long-Term Capital Management,” Federal Reserve Bank of New York, Federal Reserve History, September 1998, www.federalreservehistory.org/Events/DetailView/52.


pages: 1,336 words: 415,037

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

affirmative action, Albert Einstein, anti-communist, Ayatollah Khomeini, barriers to entry, Bear Stearns, Bob Noyce, Bonfire of the Vanities, Brownian motion, capital asset pricing model, card file, centralized clearinghouse, Charles Lindbergh, collateralized debt obligation, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, Donald Trump, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, Garrett Hardin, global village, Golden Gate Park, Haight Ashbury, haute cuisine, Honoré de Balzac, If something cannot go on forever, it will stop - Herbert Stein's Law, In Cold Blood by Truman Capote, index fund, indoor plumbing, intangible asset, interest rate swap, invisible hand, Isaac Newton, Jeff Bezos, John Meriwether, joint-stock company, joint-stock limited liability company, Long Term Capital Management, Louis Bachelier, margin call, market bubble, Marshall McLuhan, medical malpractice, merger arbitrage, Mikhail Gorbachev, money market fund, moral hazard, NetJets, new economy, New Journalism, North Sea oil, paper trading, passive investing, Paul Samuelson, pets.com, Plutocrats, plutocrats, Ponzi scheme, Ralph Nader, random walk, Ronald Reagan, Scientific racism, shareholder value, short selling, side project, Silicon Valley, Steve Ballmer, Steve Jobs, supply-chain management, telemarketer, The Predators' Ball, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tragedy of the Commons, transcontinental railway, two and twenty, Upton Sinclair, War on Poverty, Works Progress Administration, Y2K, yellow journalism, zero-coupon bond

Already fragmented into disparate power bases, Salomon now evolved into a system of warlords: a corporate-bond warlord, a government-bond warlord, a mortgage-bond warlord, an equities warlord.36 One ruled above them all: the warlord of bond arbitrage, a soft-spoken, brilliant mathematician, the forty-year-old John Meriwether. The shy, self-effacing “J.M.,” a former PhD candidate, expressed his outsize ambitions through a team of professors he had lured with Wall Street salaries from schools like Harvard and MIT. These “arb boys” hunched protectively over their computers, fiddling with mathematical models portraying the bond universe, an oasis of intellect amid the belching, sweating traders, who more often swung from their gut.

14 When pressed, Feuerstein gave Munger a much fuller description of events, similar to what Corrigan had been told.15 As Feuerstein recounted, Mozer had gotten a letter from the Treasury Department in April saying they were investigating one of his bids.16 Realizing that the game was up, on April 25 he had gone to his boss, John Meriwether, and made a confession of sorts. In February, to get around the thirty-five percent limit, he had not only bid in Salomon’s name, he had also submitted phony bids under real customers’ names.17 Mozer swore to Meriwether that this was the only time, and he would never do it again. Meriwether had recognized immediately that this was “career-threatening,” had said so to Mozer, and had reported the situation to Feuerstein and Strauss.

If Salomon went down afterward, he would be even more closely associated with shame and disaster. But if there was anybody who could get himself and the other shareholders out of this mess, he was that person. To do so he would have to extend the umbrella of his reputation, already at risk, even further to protect the firm. There was no way to avoid this challenge. Deryck Maughan and John Meriwether could not do it. He could not send somebody from Munger, Tolles, or Charlie Munger, or Tom Murphy, or Bill Ruane. He could not solve it by passing an idea along to Carol Loomis for an incisive article in Fortune. Even Big Susie could not solve this. For once, nobody could be his proxy. Only he could save Salomon.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, salary depends on his not understanding it, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

Arbitrage involves taking matched positions – buying one security, selling another, when the price differential moves outside its normal range. Such arbitrage strategies were widely used by Long-Term Capital Management, the hedge fund that collapsed spectacularly in 1998. LTCM, best known for its association with the two Nobel Prize-winning economists Robert Merton and Myron Scholes, was founded by John Meriwether, who had headed the trading operations of Salomon Bros in the 1980s (those described by Michael Lewis in his book Liar’s Poker) which pioneered the explosive growth of FICC trading. The fund was largely staffed by his former colleagues, and insiders often described it as ‘Salomon North’. In the end, the LTCM trades were settled profitably by the investment banks which had taken them over: a telling illustration of Keynes’s (possibly apocryphal) dictum that ‘markets can remain irrational for longer than you can stay solvent’.4 More recently, the mathematical analysis of trading patterns has enabled some algorithmic traders to make returns from minute movements in the prices of securities.

Salomon Bros, which had done so much to promote the rise of the trading culture, became part of Citigroup; Warburg, the City of London’s most innovative investment bank, was acquired by UBS. Retail banks such as Barclays and J.P. Morgan developed their investment banking activities. Some smaller investment banks, such as Lazards, withdrew into specialist niches, while John Meriwether – Lew Ranieri’s boss at Salomon – founded his own firm: Long-Term Capital Management. Fig. 3: Annualised shareholder returns of major banks, August–August (per cent per annum) Total shareholder return (including dividends) *Composed of large and mid-cap stocks across twenty-three developed markets.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, risk free rate, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, Washington Consensus, Yom Kippur War

They also needed a great deal of computing power, a force which had been transforming the financial markets since the early 1980s. All they required now was a partner with some market savvy and they could make the leap from the faculty club to the trading floor. Struck down by cancer, Fisher Black could not be that partner. Instead, Merton and Scholes turned to John Meriwether, the former head of the bond arbitrage group at Salomon Brothers, who had made his first fortune out of the Savings and Loans meltdown of the late 1980s. The firm they created in 1994 was called Long-Term Capital Management. It seemed like the dream team: two of academia’s hottest quants teaming up with the ex-Salomon superstar plus a former Federal Reserve vice-chairman, David Mullins, another ex-Harvard professor, Eric Rosenfeld, and a bevy of ex-Salomon traders (Victor Haghani, Larry Hilibrand and Hans Hufschmid).

Suddenly all the different markets where Long-Term had exposure were moving in sync, nullifying the protection offered by diversification. In quant-speak, the correlations had gone to one. By the end of the month, Long-Term was down 44 per cent: a total loss of over $1.8 billion.94 August is usually a time of thin trading in financial markets. Most people are out of town. John Meriwether was on the other side of the world, in Beijing. Dashing home, he and his partners desperately sought a white knight to rescue them. They tried Warren Buffett in Omaha, Nebraska - despite the fact that just months before LTCM had been aggressively shorting shares in Buffett’s company Berkshire Hathaway.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, compensation consultant, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, selling pickaxes during a gold rush, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

When Eugene Fama and Kenneth French published their research on the outperformance of value stocks, Sinquefield and Booth (who in 2008 gave $300 million to the Chicago Business School, which was renamed in his honor) signed them up as advisers and launched a value fund that was hard to distinguish from the value funds run by efficient market nonbelievers. The most fascinating case was that of Robert Merton and Myron Scholes. In the 1980s, a spectacularly successful proprietary trading operation emerged at the bond brokerage Salomon Brothers. At its head was Chicago MBA John Meriwether, who assembled a team of traders and quants led by one of the best Ph.D. students Merton ever taught, Eric Rosenfeld. The approach was similar to Ed Thorp’s, but with bonds instead of stocks and a lot more swashbuckling. Rosenfeld lured Merton on board in 1988 as a “special consultant to the Office of Chairman.”

The hedge fund had grown out of the proprietary trading desk at Salomon Brothers, and signed up Robert Merton and Myron Scholes as partners. It followed the approach of quantitative pioneer Ed Thorp: Find two securities that by all rights ought to be traveling in the same direction but weren’t, and bet that they would converge. A longtime favorite of LTCM chief John Meriwether was the off-the-run treasury trade. Brand-new thirty-year treasuries often sold at markedly higher prices than identical securities issued six months before. When that happened, LTCM sold the new treasuries short, bought the “off-the-run” treasuries, and usually made an easy profit. By the mid-1990s lots of other hedge funds and Wall Street trading desks were making similar trades.


pages: 542 words: 145,022

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest by Andrew W. Lo, Stephen R. Foerster

"Robert Solow", Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, Charles Lindbergh, compound rate of return, corporate governance, Covid-19, COVID-19, credit crunch, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, Edward Glaeser, equity premium, estate planning, Eugene Fama: efficient market hypothesis, family office, fiat currency, financial innovation, financial intermediation, fixed income, hiring and firing, Hyman Minsky, implied volatility, index fund, interest rate swap, Internet Archive, invention of the wheel, Isaac Newton, John Meriwether, John von Neumann, joint-stock company, Kenneth Arrow, linear programming, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, new economy, New Journalism, Own Your Own Home, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, prediction markets, price stability, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, selection bias, shareholder value, Sharpe ratio, short selling, South Sea Bubble, stochastic process, stocks for the long run, survivorship bias, tail risk, Thales and the olive presses, Thales of Miletus, The Myth of the Rational Market, The Wisdom of Crowds, Thomas Bayes, time value of money, transaction costs, transfer pricing, tulip mania, Vanguard fund, yield curve, zero-coupon bond, zero-sum game

In 1976, Merton and Scholes created the first options-based mutual fund, which provided investors with exposure to the stock market but with downside protection, a precursor to the portfolio insurance products that were popular in the 1980s. In 1988, Merton joined Salomon Brothers, the global investment bank then led by John Gutfreund, as a special consultant to the Office of the Chairman. John Meriwether was the head of the domestic fixed-income arbitrage group and had attracted many of Merton’s former students, most of whom had PhDs.56 Meriwether left Salomon Brothers in 1991, and in 1993 he had the idea to start a new firm. This would be a hedge fund named Long-Term Capital Management (LTCM), founded to undertake global fixed-income arbitrage on, for example, price discrepancies between similar bonds trading in different markets.

Buser (2005). 55. Information in this paragraph is from Merton (1997a). 56. In his entertaining book Liar’s Poker, Michael Lewis recounts his days with Salomon Brothers, providing an inside look into the investment bank culture in the 1980s. The title of the book is based on his recounting of how John Meriwether challenged John Gutfreund to a game of liar’s poker—a game of mathematical reasoning and bluffing based on serial numbers on random dollar bills—for a stake of $10 million. 57. Strategies and events were described in a series of Harvard Business School case studies titled “Long-Term Capital Management, L.P.” written by Andre F.


Day One Trader: A Liffe Story by John Sussex

algorithmic trading, Boris Johnson, credit crunch, fixed income, John Meriwether, Long Term Capital Management, Neil Kinnock, Nick Leeson, offshore financial centre, statistical arbitrage

Needless to say his brightly polished black shoes were well trodden on before the day’s trading was done. Locals on the Liffe floor could be just as vulnerable to cannons firing financial bombs out of America as the rest of the world’s economies when the excesses of US capitalism come unstuck. John Meriwether was in his prime as head of the domestic fixed income arbitrage group at Salomon Brothers when the Liffe market started to take off in the early eighties. Meriwether would often call dealers at Liffe to execute trades for him. During his tenure as Salomon’s floor manager in London, Ersser regularly spoke to Meriwether.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

asset-backed security, Bear Stearns, Bernie Madoff, business cycle, buttonwood tree, buy and hold, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, mega-rich, merger arbitrage, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, tail risk, time value of money, too big to fail, traveling salesman, two and twenty, value at risk, yield curve, Yogi Berra, zero-sum game

If anybody knows, they would”—but most people on Wall Street seemed to be caught up in the euphoria over the Goldman IPO. —— WHAT A SHAME, then, that a little crisis—in the form of the blowup of the hedge fund Long-Term Capital Management, or LTCM as it was known—would come along at just this moment to spoil Goldman’s coming-out party. LTCM was the brainchild of John Meriwether, a famed Salomon Brothers bond trader and one of Corzine’s trading heroes. Meriwether started LTCM in 1994. Corzine had considered having Goldman make an investment in LTCM and even considered buying the firm itself. But, in the end, Goldman decided to be one of LTCM’s many trading partners on Wall Street.

“He was doing this float-around,” Corzine told Lowenstein. “You’d lose contact and couldn’t speak for two to three hours.” But the message got through: “Buffett was willing to let Goldman handle the details, but under no circumstances did he want his investment to be managed by LTCM or to have anything to do with John Meriwether,” Lowenstein wrote. “Then the connection blacked out.” They spoke again on Saturday, and Buffett was still somewhat uncertain about a deal. Later that night, Corzine called Fisher and told him that a private rescue seemed unlikely. Fisher broached the idea of getting a group of the biggest banks together at the New York Fed and seeing if they could save LTCM.

He was included as a director and co-chairman of the firm “but will resign both positions immediately prior to the date of the” IPO, the document added, helpfully. He no doubt left with a fine consolation prize of more than 4 million Goldman shares, but it must have stung nonetheless to be so summarily excluded from the transaction he had worked tirelessly to make happen. —— IN THE FIRST few months after the coup, Corzine worked together with John Meriwether to try to buy LTCM back from the consortium of banks that owned it. But that had more or less fallen through—despite their putting together a syndicate willing to invest $2 billion—when Frank Lautenberg, the U.S. senator from New Jersey, announced in February 2000 that he was not going to seek reelection.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, statistical model, Tax Reform Act of 1986, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

(It’s what Nick Leeson was supposed to be doing, exploiting tiny differences in the price of Nikkei 225 futures between the Osaka exchange, where trading was electronic, and the Singapore exchange, where it wasn’t. The gap in price would last only for a couple of seconds, and in that gap Barings would buy low and sell high—a guaranteed, risk-free profit.) The complexity of the mathematics involved in derivatives can’t be exaggerated. This was the reason John Meriwether, a famous bond trader, employed Myron Scholes—he of the Black-Scholes equation—and Robert Merton, the man with whom he shared the 1997 Nobel Prize in Economics, to be directors and cofounders of his new hedge fund, Long-Term Capital Management.* The idea was to use these big brains to create a highly leveraged, arbitraged, no-risk investment portfolio designed to profit no matter what happened, whether the market went up, down, or sideways or popped out for a cheese sandwich.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Asian financial crisis, banking crisis, Bear Stearns, Bretton Woods, business cycle, buy and hold, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, Nixon triggered the end of the Bretton Woods system, offshore financial centre, payday loans, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

That’s essentially what you need to believe if you want to categorically oppose hedge fund regulation, as the Bush administration does. Former Treasury Secretary Robert Rubin, hardly known for his hostility to capital flows, hints at this point in his memoirs, where he writes that his first reaction to the news of LTCM’s collapse was to say, “I don’t understand how someone like [head of LTCM] John Meriwether ... could get into this kind of trouble.” After all, Rubin notes, Meriwether was one of the country’s leading financial minds, and he had two Nobel laureates working with him. But they were “betting the ranch on the basis of mathematical models.” As with any bet, the only way to be sure you’ll win is to see into the future.


pages: 290 words: 83,248

The Greed Merchants: How the Investment Banks Exploited the System by Philip Augar

Andy Kessler, barriers to entry, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, business cycle, buttonwood tree, buy and hold, capital asset pricing model, commoditize, corporate governance, corporate raider, crony capitalism, cross-subsidies, financial deregulation, financial innovation, fixed income, Gordon Gekko, high net worth, information retrieval, interest rate derivative, invisible hand, John Meriwether, Long Term Capital Management, Martin Wolf, new economy, Nick Leeson, offshore financial centre, pensions crisis, regulatory arbitrage, risk free rate, Sand Hill Road, shareholder value, short selling, Silicon Valley, South Sea Bubble, statistical model, Telecommunications Act of 1996, The Chicago School, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, tulip mania, value at risk, yield curve

This sense of security was shaken in September 1998, the month ‘when genius failed’ and Long-Term Capital Management, a high profile hedge fund, collapsed. The firm had about $5 billion of its own capital and borrowed getting on for $100 billion to leverage its trades. Under the leadership of John Meriwether, still then a legend for his time at Salomon Brothers, and with the expertise of a group of highly qualified arbitrageurs, professors and two Nobel Prize winners, the fund had a four-year winning streak of 40 per cent per annum and its models seemed infallible. However, the Russian financial default in the summer of 1998 set off a train of events that pushed market prices beyond what the firm’s models had predicted.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, collapse of Lehman Brothers, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial independence, financial innovation, fixed income, full employment, implied volatility, index fund, information asymmetry, Isaac Newton, John Meriwether, Long Term Capital Management, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

However, the old behavioural trait of over-confidence appears to have struck, as the firm moved into other, less familiar markets. Luck versus skill is always hard to discern, even in those who have achieved extraordinary returns in the past. Other notable examples of just how difficult it is to exist: John Meriwether’s Long Term Capital Management, complete with two Nobel Prize winning economists, threatened to drag down the global financial system with it – the company had a $100 billion balance sheet when it got its view on Russia wrong and markets behaved out of line with expected, at least in their eyes, norms.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

"Robert Solow", banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, Everybody Ought to Be Rich, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, job polarisation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

According to their architects, by anticipating and controlling the level of risk, finance could increase the level of liquidity in the markets and improve the level of efficiency with which resources were allocated, thus enabling a higher level of national and world economic activity. This claim seemed to be vindicated when two hedge fund partners, Myron Scholes and Robert Merton, won the Nobel Prize for economics in 1997. Their Greenwichbased firm, Long Term Capital Management had been founded by John Meriwether, a former highly successful bond trader at Salomon, Lewis’s boss and widely believed to be the inspiration for the Bonfire of the Vanities , Tom Wolf’s 1980s novel of Wall Street excess. For a while the heavily-leveraged operation grew to be one of the most lucrative of the American hedge funds.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bond market vigilante , bonus culture, Bretton Woods, business climate, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

Another reason prices can diverge from fundamentals for a considerable period is that arbitrage, whereby investors simultaneously buy and sell identical or similar financial instruments which are temporarily mis-priced and thus bring prices back into line, is rarely free of risk. This was amply demonstrated by the near-collapse in 1998 of Long-Term Capital Management, a hedge fund run by former Salomon Brothers trader John Meriwether, which counted two distinguished finance academics, Robert Merton and Myron Scholes, on its strength. LTCM used complex mathematical models to exploit minute divergences in the relative value of different bonds. It was betting on the idea that the valuations would inevitably converge by buying the underpriced security and selling the overpriced security in the hope of making a small margin on the trade when convergence took place.


pages: 265 words: 93,231

The Big Short: Inside the Doomsday Machine by Michael Lewis

Asperger Syndrome, asset-backed security, Bear Stearns, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, facts on the ground, financial innovation, fixed income, forensic accounting, Gordon Gekko, high net worth, housing crisis, illegal immigration, income inequality, index fund, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, medical residency, money market fund, moral hazard, mortgage debt, pets.com, Ponzi scheme, Potemkin village, quantitative trading / quantitative finance, risk free rate, Robert Bork, short selling, Silicon Valley, tail risk, the new new thing, too big to fail, value at risk, Vanguard fund, zero-sum game

In the two decades after I left, I waited for the end of Wall Street as I had known it. The outrageous bonuses, the endless parade of rogue traders, the scandal that sank Drexel Burnham, the scandal that destroyed John Gutfreund and finished off Salomon Brothers, the crisis following the collapse of my old boss John Meriwether's Long-Term Capital Management, the Internet bubble: Over and over again, the financial system was, in some narrow way, discredited. Yet the big Wall Street banks at the center of it just kept on growing, along with the sums of money that they doled out to twenty-six-year-olds to perform tasks of no obvious social utility.


pages: 293 words: 88,490

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction by Richard Bookstaber

"Robert Solow", asset allocation, bank run, Bear Stearns, bitcoin, business cycle, butterfly effect, buy and hold, capital asset pricing model, cellular automata, collateralized debt obligation, conceptual framework, constrained optimization, Craig Reynolds: boids flock, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, disintermediation, Edward Lorenz: Chaos theory, epigenetics, feminist movement, financial innovation, fixed income, Flash crash, Henri Poincaré, impact investing, information asymmetry, invisible hand, Isaac Newton, John Conway, John Meriwether, John von Neumann, Joseph Schumpeter, Long Term Capital Management, margin call, market clearing, market microstructure, money market fund, Paul Samuelson, Pierre-Simon Laplace, Piper Alpha, Ponzi scheme, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, Richard Feynman, risk/return, Saturday Night Live, self-driving car, sovereign wealth fund, the map is not the territory, The Predators' Ball, the scientific method, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, tulip mania, Turing machine, Turing test, yield curve

If the perception had instead been that capital would be forthcoming, or if the letter had been successful in its (fairly transparent) pitch of new opportunities, the resulting actions would have been different. The failure might have been averted, and new opportunities could indeed have been seized. LTCM’s founder John Meriwether reflected after the calamity, quoting his colleague Victor Haghani, “The hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen, because the people who know you have sold the insurance can make it happen.”


Risk Management in Trading by Davis Edwards

asset allocation, asset-backed security, backtesting, Bear Stearns, Black-Scholes formula, Brownian motion, business cycle, computerized trading, correlation coefficient, Credit Default Swap, discrete time, diversified portfolio, fixed income, implied volatility, intangible asset, interest rate swap, iterative process, John Meriwether, London Whale, Long Term Capital Management, margin call, Myron Scholes, Nick Leeson, p-value, paper trading, pattern recognition, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, stochastic process, systematic trading, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

As a result, the dominant trader suffered mark‐to‐market losses, was unable to get out of their positions, and prices rebounded after the forced liquidation of the dominant market participant. Long Term Capital Management Long Term Capital Management (LTCM) went bankrupt in 1998 following a panic in Asian and Russian bonds. The hedge fund was the darling of Wall Street in the 1990s after being founded by the former vice‐chairman of Solomon Brothers, John Meriwether, and included Nobel Prize winners Myron Scholes and Robert Merton on its board of directors. LTCM was the dominant holder in several varieties of Russian bonds. Many of these bonds had identical payoffs differentiated by different rules on trading prior to expiration. If held to maturity, these bonds would have provided a guaranteed profit.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

Asian financial crisis, bank run, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game

Thank you to my economics mentors, John Makin, Greg “the Hawk” Hawkins, David Mullins, Jr., Myron Scholes and Bob Barbera. Given my heterodox theoretic approach to their field, I thank them for listening and sharing their thoughts and views. Thanks also to my market mentors, Ted Knetzger, Bill Rainer, John Meriwether, Jim McEntee, Gordon Eberts, Chris Whalen, Peter Moran and Dave “Davos” Nolan. Davos and I shorted Fannie Mae stock at $45 per share in 2005 and lost money when it went to $65. Today it trades for 39 cents. Timing is everything. With Washington, D.C., now the financial as well as political center of the universe, a book like this could not have been written without the support and encouragement of, and many sets of intellectual ping-pong with, those who are closest to the power.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, price mechanism, purchasing power parity, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, Savings and loan crisis, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, Tax Reform Act of 1986, the market place, transaction costs, Y2K, yield curve, zero-sum game

Short Selling strategies maintain a net or simple short exposure relative to the market. Chapter 12 Keeping the Wheels on the Hedge-Fund ATV 227 The potential downside of hedge-fund strategies is, if misapplied, they can bring disastrous results. The Long-Term Capital Management (LTCM) debacle is such an example. John Meriwether, a bond trader from Salomon Brothers with a well-known and favorable track record, founded LTCM in 1993. Investment banks quickly poured more than $1 billion into the fund, yet in only a few years the fund was well overexposed to risk and near belly-up. Many consider LTCM to be a worst-case scenario—the hedge-fund ghost haunting the sector to this day.


pages: 364 words: 101,286

The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot, Richard L. Hudson

Albert Einstein, asset allocation, Augustin-Louis Cauchy, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black-Scholes formula, British Empire, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, carbon-based life, discounted cash flows, diversification, double helix, Edward Lorenz: Chaos theory, Elliott wave, equity premium, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, full employment, Georg Cantor, Henri Poincaré, implied volatility, index fund, informal economy, invisible hand, John Meriwether, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market microstructure, Myron Scholes, new economy, paper trading, passive investing, Paul Lévy, Paul Samuelson, Plutocrats, plutocrats, price mechanism, quantitative trading / quantitative finance, Ralph Nelson Elliott, RAND corporation, random walk, risk free rate, risk tolerance, Robert Shiller, Robert Shiller, short selling, statistical arbitrage, statistical model, Steve Ballmer, stochastic volatility, transfer pricing, value at risk, Vilfredo Pareto, volatility smile

In the end, several banks reluctantly agreed to bail out the fund through a $3.625 billion takeover. That came only at the behest of the Federal Reserve Board, which was concerned about a wave of bankruptcies if LTCM went under. Scholes himself later denied that the option-pricing models played any but “a minor role” in the debacle. But some of his partners do not see it quite that way. John Meriwether, the fund’s prime mover and the man who may have lost the most, $150 million, told the Wall Street Journal: “Our whole approach was fundamentally flawed.” In launching a new fund in 2000 (Wall Street folk are nothing if not resilient), he observed: “With globalization increasing, you’ll see more crises.


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

AltaVista, Andrei Shleifer, asset allocation, Cass Sunstein, coronavirus, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, John Meriwether, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, Monkeys Reject Unequal Pay, moral hazard, Myron Scholes, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, Yogi Berra, zero-sum game

This is what John Maynard Keynes meant when he said that markets can stay wrong longer than you can stay solvent. In the summer of 1998, a small group of experts forgot this lesson and in the process brought the world to the brink of financial catastrophe. The experts worked for Long-Term Capital Management (LTCM), a hedge fund that was started in 1994 by John Meriwether, a former bond trader whose trading skills had made him a legend on Wall Street. From the outside, LTCM looked a little like the Manhattan Project of investing. Meriwether had hired a host of Wall Street whiz kids who were experts in using computer models to figure out how to make money. And he’d brought on board some of the founding fathers of modern finance.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, price anchoring, price stability, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, tail risk, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

The events of 1998 have special interest for the story in this book, because the crisis was brought to a head in the financial markets by the imminent failure of a hedge fund called Long-Term Capital Management, or LTCM, which had opened for business in February 1994. Nobel Prize winners Robert C. Merton and Myron Scholes were partners in LTCM, and the managing partner was John Meriwether, the legendary bond trader from Salomon Brothers. The repercussions of a possible LTCM default were viewed as so serious in financial markets around the world, especially in view of the participation of Merton and Scholes, that the Federal Reserve Bank of New York had to organize a bailout to prevent this disaster from becoming a reality.


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, buy and hold, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, foreign exchange controls, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, intangible asset, interest rate derivative, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, risk free rate, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

London is the largest hedge fund management centre in Europe, and second in size only to the United States. A hedge fund can fail as well as succeed, and it may be on a spectacular scale. Long Term Capital Management (LTCM) demonstrated the point with its high-profile failure in 1998. It was a hedge fund headed by John Meriwether, who had previously run the bond trading operations of Salomon Brothers. The fund was highly geared and used derivatives, taking positions in bonds. The mathematical model on which the fund manager relied failed to take into account the flight to liquidity in the debt markets after Russia defaulted on its sovereign debt in August and September 1998.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

Such insurance can be easy to purchase in good times, but in bad times, no one will be willing to provide it. The system cannot insure itself. Making a huge bet, particularly on illiquid assets, is thus a very perilous pastime. The collapse of Long-Term Capital Management in 1998 was a classic example of this. LTCM was a hedge fund led by a bond trader called John Meriwether who had worked at Salomon Brothers, then one of Wall Street’s leading firms. He hired a stellar team, including two Nobel prize-winning economists, Robert Merton and Myron Scholes. LTCM pursued a strategy called arbitrage, buying assets that looked artificially cheap and selling short (betting on a falling price) similar assets that looked expensive.


pages: 407 words: 104,622

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Andrew Wiles, automated trading system, backtesting, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, blockchain, Brownian motion, butter production in bangladesh, buy and hold, buy low sell high, Claude Shannon: information theory, computer age, computerized trading, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversified portfolio, Donald Trump, Edward Thorp, Elon Musk, Emanuel Derman, endowment effect, Flash crash, George Gilder, Gordon Gekko, illegal immigration, index card, index fund, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, Loma Prieta earthquake, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, Mark Zuckerberg, Monty Hall problem, More Guns, Less Crime, Myron Scholes, Naomi Klein, natural language processing, obamacare, p-value, pattern recognition, Peter Thiel, Ponzi scheme, prediction markets, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, Robert Mercer, Ronald Reagan, self-driving car, Sharpe ratio, Silicon Valley, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, Steve Bannon, Steve Jobs, stochastic process, the scientific method, Thomas Bayes, transaction costs, Turing machine

The embarrassed representative had to ask the visitor to kindly turn off his machine. They were going a bit overboard. At that point, no one really cared what Simons and his team were up to. His two largest rivals, Long-Term Capital Management and D. E. Shaw, were commanding the full attention of investors. Founded by John Meriwether—himself a former mathematics instructor—Long-Term Capital Management also filled its ranks with professors, including Eric Rosenfeld, an MIT-trained finance PhD and computer devotee, and Harvard’s Robert C. Merton and Myron Scholes, who would become Nobel laureates. The team—mostly introverts, all intellectuals—downloaded historic bond prices, distilled overlooked relationships, and built computer models predicting future behavior.


Stock Market Wizards: Interviews With America's Top Stock Traders by Jack D. Schwager

Asian financial crisis, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Black-Scholes formula, commodity trading advisor, computer vision, East Village, Edward Thorp, financial independence, fixed income, implied volatility, index fund, Jeff Bezos, John Meriwether, John von Neumann, locking in a profit, Long Term Capital Management, margin call, money market fund, Myron Scholes, paper trading, passive investing, pattern recognition, random walk, risk free rate, risk tolerance, risk-adjusted returns, short selling, Silicon Valley, statistical arbitrage, the scientific method, transaction costs, Y2K

While our losses were much smaller, in both percentage and absolute dollar terms, than those suffered by, for example, Long Term Capital Management, they were significant enough that we're no longer engaged in this sort of trading at all. LTCM—a hedge fund headed by renowned former-Salomon bond trader John Meriwether and whose principals included economics Nobel laureates Robert Merton and Myron Scholes—was on the brink of extinction during the second half of 1998. After registering an average annual gain of 34 percent in its first three years and expanding its assets under management to near $5 billion, LTCM lost a staggering 44 percent (roughly $2 billion) in August 1998 alone.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

"Robert Solow", Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Bretton Woods, British Empire, business cycle, buy and hold, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, margin call, market bubble, McMansion, Menlo Park, money market fund, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, Savings and loan crisis, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

According to Scholes, Enron’s trading of unregulated over-the-counter energy derivatives was a new model that someday would replace the organized [and regulated] securities exchanges.”6 Enron’s specialized derivatives left the company bankrupt in 2001, and General Electric’s financial ventures led it to government life support by 2008. The year after Merton and Scholes received their Nobel Prizes, the firm where they applied their theories collapsed. John Meriwether had anticipated the derivatives boom by forming his Arbitrage Group at Salomon Brothers in 1977.7 Meriwether left Salomon in 1991. In 1993, he formed LongTerm Capital Management (LTCM). He hired his top Salomon colleagues, including Merton and Scholes. By 1997, LTCM employed 25 Ph.D.s, who manufactured highly quantitative arbitrage trades.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

3Com Palm IPO, Albert Einstein, asset allocation, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, caloric restriction, caloric restriction, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial innovation, Garrett Hardin, George Santayana, German hyperinflation, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Meriwether, John Nash: game theory, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, margin call, Mason jar, merger arbitrage, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stocks for the long run, survivorship bias, tail risk, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Tragedy of the Commons, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

The list of issues goes on, the point being that hedge fund investors don’t have much protection and that the most important single thing to check before investing is the honesty, ethics, and character of the operators. The hedge fund Long-Term Capital Management was launched in 1994 with a dream team of sixteen general partners, led by the legendary former Salomon Brothers trader John Meriwether and two future (1997) Nobel Prize winners in economics, Robert Merton and Myron Scholes. The group included other former Salomon traders, more distinguished academics, and a former Federal Reserve vice chairman. Investors included the central banks of eight countries, plus major brokerages, banks, and other institutions.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

While LTCM was a well-known trader in fixed-income and derivatives markets, the extent of its trading in equity markets was not well known. LTCM was the largest risk arbitrageur in the world, with over $15 billion in equity positions on pending deals. Upon reviewing the books and records of LTCM with the author and CEO John Meriwether on September 20, 1998, Peter R. Fisher, then head of open market operations at the Federal Reserve Bank of New York, remarked, “We knew you guys might take down the bond markets, but we had no idea you would take down the stock markets too.” The Fed’s effort to orchestrate a bailout commenced the next morning and was completed on September 28, 1998.


pages: 436 words: 76

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

"Robert Solow", Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, business cycle, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, Gunnar Myrdal, haute couture, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, Kenneth Arrow, Kevin Kelly, knowledge economy, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, Savings and loan crisis, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, yield curve, yield management

"When the allocation of capital is the byproduct of the activities of a casino, the job is likely to be ill done," Keynes wrote in the aftermath of the bubble of 1929, but his words are equally relevant to the bubble of 2000. The outcomes of LTCM, Bankers Trust, and Hurricane Hugo were perhaps adaptive, in the sense that people who mismanaged risk lost their jobs, their wealth, or went out of business (although not for long: John Meriwether, the creator of LTCM, was back in business fifteen months later soliciting money for his Relative Value Opportunity Fund). 22 But the outcomes were not efficient in either the technical or the ordinary sense of market efficiency. The concept of an efficient market in risk, which manages for us the risks inherent in modern economic life, is attractive.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Paul Lambert, Aston Villa manager, press conference, 22 November 2013 Are we really capable of expecting the unexpected?1 In 1998, the hedge fund Long-Term Capital Management (LTCM) failed, although its senior management team comprised two Nobel Laureates in Economic Science, Myron Scholes and Robert Merton, and an experienced practitioner in financial markets, John Meriwether. Their strategy, successful at first, was to create a highly leveraged fund that bought large amounts of one asset and sold equally large amounts of a slightly different asset (for example, government bonds of slightly different maturities), so as to exploit anomalies in the pricing of those assets.


pages: 467 words: 154,960

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

Albert Einstein, Atul Gawande, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, capital asset pricing model, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, game design, hindsight bias, housing crisis, index fund, Isaac Newton, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

LTCM attracted the elite of Wall Street’s investors and initially reaped fantastic profits managing their money. Ultimately, their theories collided with reality and sent the company spiraling out of control.24 Needless to say, this was not supposed to happen: “They were immediately seen as a unique enterprise. They had the best minds. They had a former vice chairman of the Federal Reserve. They had John Meriwether…So they were seen by individual investors, but particularly by banks and institutions that went in with them, as a ticket to easy street.”25 The most damaging consequence of the LTCM episode is, therefore, the harm done by the perception that Federal Reserve policy makers do not have the faith to take their own medicine.


pages: 733 words: 179,391

Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

"Robert Solow", Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, Sam Peltzman, Savings and loan crisis, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, survivorship bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

Evolutionary competition caused hedge funds to trawl the universities for high-caliber mathematical talent, not merely in finance, but in physics, mathematics, and computer science—the rise of the “quants.” One of the most audacious experiments in this new style of hedge fund was based in Greenwich, Connecticut. It called itself Long-Term Capital Management, or LTCM, as it soon became known. LTCM was the brainchild of John Meriwether, the former head of the domestic fixed-income arbitrage group at Salomon Brothers, once one of Wall Street’s largest investment banks. Meriwether conceived LTCM to operate on a grand scale. If we think of hedge funds as analogous to biological species, then Meriwether’s vision of LTCM was to be one of the great filter-feeding whales of the oceanic depths, using very small fluctuations in the world’s bond markets for its financial sustenance.


pages: 612 words: 179,328

Buffett by Roger Lowenstein

asset allocation, Bear Stearns, Bretton Woods, buy and hold, cashless society, collective bargaining, computerized trading, corporate raider, credit crunch, cuban missile crisis, Eugene Fama: efficient market hypothesis, index card, index fund, interest rate derivative, invisible hand, Jeffrey Epstein, John Meriwether, Long Term Capital Management, moral hazard, Paul Samuelson, random walk, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, selection bias, The Predators' Ball, traveling salesman, Works Progress Administration, Yogi Berra, young professional, zero-coupon bond

Short and thick-lipped, he would stroll past rows of traders, trailed by a vaporous cloud of cigar smoke. With his plum-sized jowls, he would lacerate underlings in full view of their peers. “He’d take someone to task,” a partner recalled. “He could turn you into a pile of shit on the floor.” Gutfreund was said to have dared his star bond trader, John Meriwether, to bet $1 million on a single round of liar’s poker, a game that traders played during lulls in the bond market. The incident, described in Liar’s Poker, a best-selling insider’s account of the firm, was probably invented, but it enshrined Gutfreund’s image as a trader’s trader.* When not playing poker, Meriwether’s bond wizards, some of whom held Ph.D.s, made million-dollar bets on changes in interest rates using complex trading formulas.


pages: 620 words: 214,639

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan

asset-backed security, Bear Stearns, call centre, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Deng Xiaoping, diversification, Financial Instability Hypothesis, fixed income, Hyman Minsky, Irwin Jacobs, John Meriwether, Long Term Capital Management, margin call, merger arbitrage, money market fund, moral hazard, mortgage debt, mutually assured destruction, Myron Scholes, New Journalism, Northern Rock, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, Savings and loan crisis, savings glut, shareholder value, sovereign wealth fund, too big to fail, traveling salesman, Y2K, yield curve

“Both important and large. Both squared.” A couple of years before he resigned, Mattone, who sported a tremendous girth, a gold chain, and a pinky ring, had wanted to join a new start-up hedge fund, Long-Term Capital Management—LTCM for short—which was the brainchild of his former buddies at Salomon Brothers. John Meriwether, LTCM's founder and a famed Salomon bond trader, wanted Mattone to be the sixth partner of the fund, which was headquartered in Greenwich, Connecticut. As Cayne explained, Mattone came to him and said he had an opportunity to join Meriwether. “I said, ‘Vinny, are you nuts?’” Cayne remembered.